1. Legal Structures and Governance Rachel Gwynne and Emma Fitzgerald 2nd February 2010

2. Introductions Rachel Gwynne – Associate Emma Fitzgerald – Trainee Solicitor

3. Overview of today Thinking about various legal structures Spotlight on the CIC model Considering governance and effective Boards

4. Legal Structures and Governance Part 1

5. Legal structures Does it matter? Yes it does, because it affects: what you can do liability how the group can hold money or assets who will fund you and how

6. Choosing the right vehicle Where do you want to go? What are your options? How should you decide?

7. Where do you want to go? What do you want to achieve through the your organisation: trading enterprise development holding assets community engagement a long term presence Consider your aims in principle before you choose a structure

8. Where do you want to go? Key issues – do you want to: employ staff? enter into contracts? own property? provide or procure services?... independently, without risking personal liability to members If so, then you will probably need a separate vehicle

9. What are the options? Profit distributing structures Companies limited by shares Including PLCs Limited Liability Partnerships Industrial and Provident Societies Co-operatives Community interest company ltd by shares

10. What are the options? Non profit distributing structures Companies limited by guarantee Industrial and Provident Societies Community benefit Societies Community interest company limited by guarantee Charitable status?

11. What are the options? If an organisation isnt any of those, then in law its probably an unincorporated association - an association of two or more people for common purposes (but not business) with shared duties and obligations, in an organisation with rules. -Or a sole trader or partnership (if its about business).

12. So, how do you tell? Look at the constitution (if there is one) Search the Companies House website Search the Charity Commission website Search the register of industrial and provident societies http://mutuals.fsa.gov.uk/

13. So, how do you tell? If it isnt a company, an IPS or a charity … then its probably an unincorporated association (if its not about business) or a sole trader or a partnership (if it is)

14. Dont worry about labels Social Enterprise Community Development Trust Community Enterprise … dont worry too much! Basic options the same

15. Company Limited by Guarantee Registered by the Registrar of Companies Separate legal identity Any property or contract is entered into in the company (not the members') name Accounts, returns and information filed with Companies House Can be charitable or a Community Interest Company

16. Company Limited by Guarantee Common vehicle for non-profit making organisations No shares; Members give £1 guarantee Gives limited liability to members Can hold assets Can enter into contracts in its own name

17. Company Limited by Guarantee Straightforward to set up Set of standard documents to accompany the main constitutional document Flexible Memorandum and Articles of Association can be "tailor made" Process exists for changing constitution if needed Can be charitable or a CIC

18. Industrial and Provident Society Two main types: Co-operatives; and Benefit of the Community (Ben-Com) Co-ops: for the benefit of those who join it as a member Ben-Coms: organisations set up to benefit people in a particular area; person can benefit from a Ben-com even if he/she is not a member Regulated by Financial Services Authority

19. Industrial and Provident Society IPSs can now have asset lock, similar to CIC asset lock Must have special reasons to set up a Ben- Com rather than a company Ben-Coms can be charitable Generally higher set up costs than companies NB community investment – some useful key features

20. Charitable Status In order to be charitable, an organisation must be established for charitable purposes Charitable purposes means purposes which are exclusively charitable according to the law of England and Wales 13 listed in the Charities Act 2006 but a wide range in practice

21. Charitable Status Some social enterprises are charities Some helpful charitable purposes: Urban or rural regeneration Community capacity building Relieving unemployment Health warning – Charity Commission guidance! But what about activities?

22. Charitable Status Tax treatment different to normal companies Exempt from most forms of Corporation Tax Other tax advantages Access to sources of funding Restrictions on trading Regulated by Charity Commission Burning the bridge

23. Community Investment Community share issues (equity) Community bonds (debt based) Companies limited by guarantee cannot issue shares CICs ltd by shares and Community Benefit Societies can

24. Community Investment Some important features of Community Benefit Societies: One member one vote (however many shares) Withdrawable share capital (not just transferable) £20,000 investment limit for individual members And therefore, exemption from some FSA regulations in relation to share issues

25. Unincorporated Associations A group of people with a defined purpose Will have some rules, even if not written Residents associations, sports and other clubs, trade unions, event committees … Need not be of benefit to wider community

26. Unincorporated Associations Some of the implications: The organisation has no separate legal identity But: the members will still have duties and liabilities to each other … and potentially to other people

27. Trading issues What do we mean by a trading company? When might you want to set one up? What legal form do trading companies take? What are the issues in forming a group structure?

28. What is a trading subsidiary? A company (or other corporate entity) Which is: Separately registered But wholly or mainly owned by another company (the parent) And forms a group structure with that parent Distinction from joint ventures

29. When might you want one? If you are a charity and: You are restricted by the rules on charities and trading; or You want to do non charitable things If you want to: Set up something new; or Move into a risky business area; and You want to contain the risk

30. When might you want one? Charities and trading Trading is: The sale of goods or services But not: The sale of donated goods, given to the charity for selling on The sale of investments The sale of assets used by the charity for its charitable purposes The letting of land or buildings without services

31. When might you want one? Charities CAN engage in some trading: Where it contributes directly to the meeting of their objects (primary purpose trading); Where it contributes indirectly (ancillary trading); A limited amount of trading purely to raise funds, provided there is no significant risk to the charity – NB tax issues

32. What legal form do trading companies take? Often (but not always) a company limited by shares, with the parent company owning all or a majority of the shares Can be a community interest company (CIC) NB charities can now jointly own a trading company and both benefit from the gift aid provisions

33. What are the issues in managing two companies? Have to run the subsidiary as a genuinely separate company Two boards of directors – some distinct membership More meetings Administration, consolidated accounts Funding issues Other investors Funding from the parent The relationship can get complicated!

34. Legal Structures and Governance Part 2

35. Community Interest Companies Fairly new legal form for social enterprise (since 2005) CIC registration: CIC regulator Community benefit Annual Community Interest Report Standard/required provisions in M&A Asset lock No tax breaks

36. Community Interest Company Community Benefit Community Interest Test ( s35(2) Companies Audit, Investigations and Community Enterprise) Act 2004 A company satisfies the community interest test if a reasonable person might consider that its activities are being carried on for the benefit of the community or a section of the community

37. Community Interest Company The Asset Lock CIC can dispose of any asset at market value CIC can dispose at less than market value to another asset-locked body - mainly charity or another CIC Some distribution allowed in share CICs (see below) otherwise assets and income must be used for objects of CIC: no asset-stripping.

38. Community Interest Company The dividend and interest caps Recent changes announced by CIC Regulator following review (in force 6 April 2010): overall cap – no more than 35% of distributable profits can be passed to shareholders (remains the same); dividend cap on individual shares – 20% of the paid up value of a share (was BoE base rate plus 5%); and Interest on performance-related loans – cap also amended to 10% of average amount of CICs debt (was 4% over BoE base rate)

39. How do you make the choice? Assess what you want the vehicle to do Do you want to give out profits to members or investors, or is it not for profit? Is it likely to have only charitable aims? Is it likely to carry out only charitable activities? Trading? Are the tax advantages going to be important?

40. How do you make the choice? How certain are you – do you need to retain flexibility? How are you going to raise funds?

41. With us so far? Time for a break!

42. Legal Structures and Governance Part 3

43. Effective Governance Two pronged approach to effective governance: Legal / procedural documents and policies Training / soft skills

44. Documented Governance is … a framework for action a means to an end protection a way of working together

45. What is a constitution for? Organisations are not like people! They need constitutions to: tell them how to do things give them some certainty protect the members

46. What is a constitution for? Most constitutions have to meet external requirements Company constitutions Charity constitutions CIC constitutions Co-operatives and ben-coms

47. The key elements of a constitution What is this organisation? Name Aims and core purpose Powers Profit making or non profit making Equal opportunities statement

48. The key elements of a constitution Membership Who are they How do they become members Different groups? How are they removed

49. The key elements of a constitution Management Committee / Board Who is on the Board, how do they get there Any categories / criteria (eg residents, stakeholders) How long are they on for, how do you get them off? Officers?

50. The key elements of a constitution Meetings Members / Board How often? Quorum Voting Minutes

51. The key elements of a constitution Other key elements Delegations – committees, working groups Changing the constitution Dissolution Conduct of Board members

52. Other useful governance tools Complaints procedure Code of conduct Terms of reference for sub groups Scheme of delegations Financial rules See NCVOs Code of Good Governance - free from www.ncvo-vol.org.uk)www.ncvo-vol.org.uk

53. Training / Soft Skills Effective listening and communication Effective decision making Collective responsibility Collective problem solving Chairing skills

54. Any Questions

55. Legal Structures and Governance Thanks for listening! Rachel Gwynne and Emma Fitzgerald 0121 214 3532 rachel.gwynne@anthonycollins.com www.anthonycollins.com 2 nd February 2010